Transferring Assets Into Your California Asset Protection Plan

For the most part, it’s pretty easy to transfer assets into a properly formed asset protection structure. That’s especially true of our asset protection plans. Nonetheless, there are some occasional complications and difficulties that arise with the funding of various California asset protection strategies. For example, California state laws present some challenging burdens compared to other states. The purpose of this article is to provide some practical tips for funding your a California asset protection plan and to offer some general advice for making sure that your plan gets funded quickly and with the lowest possible cost.

California Asset Protection & Franchise Tax

If you live in California, state law requires that you pay a franchise tax for each business entity that you own.  That’s true no matter where the business entity was formed or exists. For example, if you live in California and you form a California limited liability company, you’ll be required to submit the appropriate tax forms and remit the franchise tax payment.  The same thing is true if you own a Nevada limited liability company or limited partnership.  The tax still applies.  It’s important to keep all this in mind when formulating an asset protection strategy.

Avoiding Reassessment of Tax Base

California asset protection law is quirky in another way too. The state can can (and will) reassess the value of real estate for tax purposes upon any transfer of title. Effectively that means you could end up paying much more in taxes if you don’t fund your asset protection plan properly. Since many plans involve holding real estate in limited liability companies which are themselves owned by a Family LLC, it can be tricky to transfer property into your plan without incurring additional taxes.

In short, there are no reassessments for “Transfers between an individual or individuals and a legal entity or between legal entities, such as a cotenancy to a partnership, or a partnership to a corporation, that results solely in a change in the method of holding title to the real property and in which proportional ownership interests of the transferors and the transferees, whether represented by stock, partnership interest, or otherwise, in each and every piece of real property transferred, remains the same after the transfer.” See

Here’s what you need suggest for funding your California asset protection plan:

  • If you plan to transfer property into a limited liability company, make sure that company is owned by the same people and in exactly the same proportions as the property is owned right now.
  • Check with the recording clerk in the deed office to find out what (if any) disclosures are necessary.
  • Transfer the property into the limited liability company via a special warranty deed.
  • Follow-up with the clerk in the deed recording department to make sure that you have adequately disclosed to them that the property is still effectively owned by the same people and in the same proportions as it was prior to the transfer.
  • Transfer the limited liability company into your Family LLC.

The same rules apply regardless of whether you are transferring property into a limited liability company, a family limited liability company, a family limited partnership, or an asset protection trust.

By carefully following the steps outlined above, you can avoid having your property reassessed inside of a California asset protection plan, which could cost you thousands of dollars every year. If you have questions about this, call me. I’ll help you lawfully protect your hard earned assets with minimum impact in terms of tax liability.

Deeding Your Home to an Asset Protection Trust & Due-On-Sale Clause

I’ve heard a lot of recent rumbling from clients about banks and mortgage servicers that are just plain uncooperative and unreasonable when it comes to transferring property into an asset protection trusts.  Banks seem to be doing a good job scaring people who want to refinance their homes.

A Typical Asset Protection Funding

Most scenarios go something like this: A client holds title to her home in the name of an asset protection trust. She decides to refinance while rates are at historic lows. The bank, however, has other plans.  The bank offers to refinance but only on the condition that the trust be amended to erode all of its asset protection featuresIt would actually be worth considering if lenders just wanted to give themselves more rights in the asset protection trust, but in most cases they insiste on completely obliterating the trust, which would open it to all future creditors. That is simply unacceptable.

My clients are savvy, so they have a better idea. Many clients simply remove the home from the asset protection trust and then refinance it. That used work just about ever time, and lenders never complained. Recently, however, lenders have been successfully scaring my clients by stating that if the home is ever deeded back to the asset protection trust, the due-on-sale clause will be triggered. Effectively, that means that the bank can accelerate the loan. In other words, they can force you to pay off the entire mortgage immediately.

It’s usually at this point that the client calls asking for help. In most cases, the bank’s behavior seems pretty insane to me. Financing a home held in an asset protection trust does not impair the bank’s rights and security interest in the home at all! It simply keeps your other creditors away from the home. In short, bank are massively wasting everyone’s time by making this an issue.

Federal Law Supports Asset Protection Trusts

The solution to the due-on-sale clause dilemma can be found in federal law. The Garn St. Germain Act, which states that a due-on-sale clause cannot be triggered when real estate is transferred “into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.” In other words, it would be unlawful for a bank to carry out the threat of triggering a due-on-sale clause if you deed your property into your asset protection trust.

How to Proceed When You Refinance

There is a simple formula you can follow when you want to refinance your home that’s held in an asset protection trust:

  1. Deed the home into your personal name.
  2. Refinance with your bank.
  3. Deed the home back to your asset protection trust, regardless of whether the bank tried to scare you with a due-on-sale clause scenario.
  4. If the bank does try to call your loan early, pass your lender a copy of the Garn St. Germain Act!

Funding Asset Protection Plans The Right Way

Lately, I’ve been fielding a lot of interesting calls  regarding “unfunded” asset protection plans.  An asset protection plan–a domestic entity like a limited liability company combined with an offshore asset protection trust–is only useful to protect assets against lawsuits and other creditors if there are actually assets titled in the name of the plan.  In other words, an asset protection plan is pretty much useless if it doesn’t actually have assets in it. Funding asset protection plans isn’t difficult work, but it’s extremely important and will take some effort on your part. It’s worth taking the time to get it right, and you should get started immediately.

Basics of Funding Asset Protection Plans

  • Primary and Second Residential Homes (i.e. homes that you actually use and don’t rent)

When funding asset protection plans, the first asset you should think about is your home. If you live in a state with strong homestead protection like Florida or Texas, then you don’t need to do anything.  Your home is exempt from creditor claims and completely protected. If, on the other hand, you live in a state like California and have a house that exceeds the limited homestead protection, then you need to take action to protect your home. The typical way to do that is to “deed” your home into your asset protection trust. The same rule applies for any second homes that you own but don’t rent (e.g. family vacation home in the mountains). By the way, this will work even if you don’t fully own the second home. For example, if you are partners with other family members, you can still deed your share of the residence into your asset protection plan.

  • Rental Properties

Rental properties carry more risk for their owners than non-rental properties.  As a result, you need to insulate them or compartmentalize that risk so that it doesn’t place an unnecessary risk on your other assets (e.g. cash, stocks, bonds).  That compartmentalization and risk insulation is achieved through the use of a limited liability company (an “LLC”) that is a subsidiary of you master limited liability company.  It works like this:

  1. The subsidiary LLC is created, and it is owned in the exact same proportions as the rental property (e.g. if you own the rental property yourself, you will need to own 100% of the LLC).
  2. Deed the rental property into the subsidiary LLC.
  3. Transfer the subsidiary LLC into your asset protection plan (i.e. the Master LLC or directly into the asset protection trust).

By following those steps precisely when funding asset protection plans, you can in some instances avoid transfer taxes and/or a reassessment for local tax purposes (always check with your local taxing authority and clerk of court to get the specific details regarding your state and county). Click here to download a guide for Florida or click here to read the Florida Funding Guide online.

  • Safe Assets a.k.a Assets That Can’t Cause Liabilities

Cash, stocks, bonds, precious metals, jewelry, valuable coins, antiques, art, and other collectibles like very expensive wine are all considered “safe assets.”  They are considered safe, because they can’t independently generate liabilities for you. People can get hurt in your houses, on your boat, in your car, and on airplanes. That’s just not true of safe assets. Because safe assets can’t harm others or cause independent liabilities, your master limited liability company can directly own safe assets, without the need to first place those assets into a subsidiary LLC.

  • Vehicles

Vehicles are risky assets. They have the potential to generat lots of liabilities. As a result, personal vehicles should be left outside your plan completely, and business vehicles should be owned either by their respective businesses or, even better, by a separate vehicle leasing LLC.  Own vehicles in your personal name, carry appropriate insurance to cover the cost of a legal defense if you’re involved in an accident, and trust that your other assets are safely protected in your asset protection plan

If you have questions on funding asset protection plans . . . .

If you have questions about funding asset protection plans, or if you’re interested to develop an asset protection strategy, call MWPatton Asset Protection Attorney today. We’ll be happy to answer your questions and provide you with a full asset protection analysis. Also, take the time to read this very good article on the adverse effects of an unfunded or improperly funded asset protection plans: Funding The Foreign Asset Protection Trust or click here to read it online.